Monday, July 10, 2006

Piggybacks and Foreclosures in Longmont

by Osman Parvez


Boulder County is fairing very well amid a gusher of foreclosures in Colorado, but as credit is further tightened by rising interest rates and more stringent lending practices, there will be continuing impact to the local real estate market.

As I've reported previously, Longmont has the largest number of foreclosures in Boulder County. As of today, 372 properties in Longmont are in some state of foreclosure. The majority of these are at the low end of the market, most for homes valued below $250,000 and many below $200,000.

This section of the market was also the most likely to be acquired by those with the least financial resources. Right or wrong, it was increasingly common for people who didn't have a 20% downpayment required for a conventional mortgage to finance their purchase through the use of a piggyback loan. These loans involved a second mortgage which closed at the same time as the first, thereby providing a borrower a way to avoid paying private mortgage insurance (PMI)

Yesterday Calculated Risk, a well written economics/housing blog, reported that rating agencies are "upping the ante" for piggyback loans because they are nearly 50% more likely to go into default than conventional mortgages. Coming federal regulations may also further reduce the availability of piggyback Loans.

It's not surprising that piggyback loans are more likely to go into default. PMI was there for a reason after all. But the availability of these loans certainly made it easier for people who otherwise couldn't to purchase a home. As piggyback loans going away, the pool of potential buyers is further restricted.

Keep in mind that while Longmont is experiencing the most foreclosures in Boulder County, it's nothing compared to other parts of the state. Adams County has about 3500 properties in foreclosure. That's nearly 2.5% of the homes in the county (according to the latest Census data).

With healthy employment rates, a low cost of living, and an ability to attract large employers like Amgen, Longmont could recover from the foreclosure hangover much more quickly than other parts of the state. In the meantime, the softness at the bottom of the market might represent a silver lining for investors.



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